Question 5
A.
Consider a baseline long run steady state equilibrium where output is 20 trillion dollars, and the price level is 100. Note: price expectation is the same as the price level at the long run steady state equilibrium & unemployment is 5% or lower
Draw the baseline long run steady state equilibrium. Suppose this equilibrium existed in September of 2021
B. Suppose the Federal Reserve undertakes expansionary
C.
monetary policies after September of 2021. What will happen to the output, employment and price level in the economy in December 2021 (assuming that monetary policies take a few months to show results)? How will you change your graph in response (you need to show a shift of some curve)?
Will you let market adjustment work? Show on the graph how market adjustment will affect the economy in May 2022 compared to where the economy was in December 2021?
